Rent To Own, How It Works

Before you decide to rent to own, you should evaluate and understand all of the risks involved

Financing a home purchase can be difficult when you have less than a stellar credit history, but you may be able to start living in the home of your dreams by taking advantage of the rent-to-own process. Rent to own is for individuals and families like you who want to move into a home right away but may need one, two, or three years to improve credit and save for a down payment. If you're able to secure a mortgage loan at the end of the lease, you can buy the home you're already occupying.

Creating a Contract

Since renting to own is a process that can take place over many years, it's important to make sure each party honors their part of the agreement by drafting a contract. This contract will establish the option price, rental price, final purchase price, maintenance agreement, and legal obligation to complete the purchase. Failure to adhere to the terms of a contract can result in lost money and even legal action, so always make sure you know what you're signing.

The One-Time Option Payment

When a homeowner enters a rent-to-own agreement with you, they are essentially removing their property from the market for one, two, or even three years. In return for this sacrifice, homeowners will usually expect a one-time non-refundable payment known as an option consideration. Their is no standard rate for this payment, but it usually falls around 2-7% of the purchase price of the home. When negotiating, try to get the seller to agree to apply the option payment to the final purchase.

The Purchase Price

Rent-to-own contracts can establish a purchase price at the signing of the agreement, or you and the seller can agree to set a final price at the end of the lease. As a buyer, you'll likely want to lock in a price if the market is on the rise, but the seller might want to do the opposite. If the market is moving in a clear direction, you may be able to negotiate a locked in price that accounts for anticipated movement in the market value of the home.

Rental Price

When you rent to own, you'll be expected to pay monthly for living in your potential new home just like you would at an apartment or other rental property. The rate will likely be a bit above similar properties in the area, but with that bump comes the option to apply part of your rent towards the final purchase. For example, the seller may agree to apply 25% of your rent toward the final price of the property, If you have a 2-year lease with $1,000 monthly rent, you'll end up with $6,000 of credit towards your purchase.

Maintenance Agreement

In a normal rental situation, the law states that property owners are responsible for repairs and maintenance. Rent to own agreements, however, are much different. A seller may decide to pay for maintenance costs themselves, but they can also obligate you as a renter to cover the costs of materials and labor for everything from lighting repairs to roof maintenance. Before signing agreement, make sure you're only obligated to pay for things you know you can afford. Who is responsible for each type of repair or maintenance should be clearly specified in the rent-to-own agreement.

Time to Purchase

When your rent-to-own lease ends, it's time to exercise your option to buy. If you decide to buy, you'll attempt to secure a loan like any other potential buyer would. When the loan is secured, you'll pay the seller in full minus any deductions set out in the original rent-to-own contract. If you decide not to buy the home or still don't qualify for a loan, you will forfeit all of the money paid to the seller during the term of the lease. Some rent-to-own contracts obligate the renter to purchase, and you may face legal action if you're unable to go through with the sale.

Before you decide to rent to own, you should evaluate and understand all of the risks involved. By having a real estate attorney read the contract before you sign, you can make sure all your bases are covered. A void in your contract can mean the loss of tens of thousands of dollars, but a successful agreement can put you and your family into the home of your dreams.